Question

Milwaukee Surgical Supplies, Inc., sells on terms of 3/10, net 30. Gross sales for the year are $1,200,000, and the collections department estimates that 30 percent of the customers pay on the tenth day and take discounts, 40 percent pay on the thirtieth day, and the remaining 30 percent pay, on average, 40 days after the purchase. (Assume 360 days per year.)

a. What is the firm’s average collection period?

b. What is the firm’s current receivables balance?

c. What would be the firm’s new receivables balance if Milwaukee Surgical toughened up on its collection policy, with the result that all nondiscount customers paid on the thirtieth day?

d. Suppose that the firm’s cost of carrying receivables was 8 percent annually. How much would the toughened credit policy save the firm in annual receivables carrying expense? (Assume that the entire amount of receivables had to be financed.)

Answer #1

a) Average collection period 27 days. (0.3 x 10 + 0.4 x 30 + 0.3 x 40)

b) Avg collection period = Receivables/ Annual Sales per
day

So, Receivables = Avg collection period * Annual Sales per day= 27
Days * $1200,000/360days = $90,000

c) Avg collection period = 24 days(0.3 x 10 + 0.7 x 30)

So Receivables = Avg collection period * Annual Sales per day= 24
Days * $1200,000/360days = $80,000

d) Initial carrying Expense 7,200

New carrying Expense 6,400

Amount Saved 800

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